My children inherited $5 million worth of stock from their father (whose estate has not been dispersed after eleven months), leaving them with about a 30% loss in value that they have had no control over. Is there a way they can choose which stocks to sell and harvest tax losses? They understand that the 10-year withdrawal period for the Individual Retirement Account (IRA) has now been reduced to nine years, making it even more burdensome. Any help is appreciated.
I’m sorry to hear about his passing. I’m sure this is already a difficult time for you and your children, and I know that dealing with his uncertain legacy and the issue of investment losses won’t make it any easier.
There may be a lot of complexities going on here that I’m not aware of as I don’t know all the details of the estate, but I’ll try to explain from a big picture perspective some of the things to look out for. that can help you decide how to move forward from here.
A financial advisor can help you make decisions about handling an inheritance and minimizing taxes.
Talk to the executor
What you need to know about inheriting shares.
Firstly, I encourage you to speak with the executor of the estate and discuss any concerns you may have. There are several possible problems that this can solve.
Without knowing anything else about the estate, I can’t say whether an 11-month wait for settlement is a long time. Simpler estates can be processed more quickly than complex ones, and more complex estates take longer. However, if you believe that settlement is being delayed due to the inaction or inability of the executor, then this should be addressed. This is especially true if the delay causes financial harm to your children.
Even if the delay is not due to something within the executor’s control, it can be helpful to know which shares your children would prefer to sell to inform the executor’s decisions. Only the executor of the will or a designated court administrator has the authority to sell estates.
Let’s also clarify their understanding of the inherited IRA distribution rules. Assuming your children are not minors, under current law they do indeed have ten years to withdraw all the money held within inherited IRAs. Specifically, the funds must be withdrawn by the end of the tenth year after the year of death of the original account owner.
If their father died sometime in 2023, they have until December 31, 2033. If he died in 2024, they have until December 31, 2034.
Unfortunately, this clock starts running the moment the original account owner dies, regardless of how long it takes to settle the remainder of the estate and distribute the assets.
Harvesting capital losses
It is unclear whether the shares in question are held within the IRA or in another account. This is important when it comes to figuring out the tax consequences and whether loss harvesting is an option.
If the shares are held within the IRA, the capital gains are already protected from taxation. The other side of the coin is that you cannot harvest capital losses for a tax benefit. What matters in this case is simply that when a distribution is received from the IRA, it is taxed as income to the recipient.
If the shares are held in a taxable brokerage account, it’s a different story. In this case, capital losses can be used to offset capital gains. However, the fact that the share value has fallen by 30% does not guarantee that losses can actually be harvested.
Make sure you check the stock’s fundamentals and understand if there are any unrealized losses. A financial advisor can help you navigate the paperwork.
Estate taxes
If the shares are actually held in a taxable account so that capital losses can be harvested to reduce tax liability, and if capital losses actually need to be harvested, you still need to consider the best approach to harvest those losses. If you sell the shares while they are still in the estate, the estate will receive the deduction for the capital loss.
That may or may not be the best approach. Although estates have a much higher tax rate than most taxpayers – between 18% and 40% – the vast majority of estates are not subject to tax at all due to the current exemption amount of $13.61 million. It could very well mean that you are making losses on an estate that has no tax liability anyway.
Distribution in kind
What you need to know about inherited shares.
If the estate instead passes the shares to your children in kind, meaning the estate does not sell the shares but distributes the actual shares to them, then their basis in the shares will most likely be their fair market value on the date their father passes . That would be the case regardless of the amount their father paid for them or what his basis was. This is called a stepped base.
This potentially creates a tax saving opportunity for your children. If the value of the share has fallen by 30% since their father’s death, there is nothing they can do about it now. If they take the distribution in kind, maybe they can sell and reap the 30% loss, which is exactly what they were hoping to do in the first place.
Next steps
I hope this provides some clarity and helps you think about your next steps. Inheritances can be very complex and tax rules often depend on small details. I highly recommend that you speak with a team that includes an attorney, tax professional, and financial planner, all of whom have the necessary expertise to help you.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAsset AMP platform nor an employee of SmartAsset. He received compensation for this article.
Tips for investing and retirement planning
If you have a significant estate, inheritance taxes can be significant. But you can plan taxes ahead to maximize your loved ones’ inheritances. For example, you can donate parts of your estate to heirs in advance or even set up a trust.
If you have questions specifically related to your investment and inheritance situation, a financial advisor can help you. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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